Taxmen denied LTCG exemption over a 7800% share price jump: How the investor won relief

The taxpayer had sold part of his shareholding in 2014 after the share price surged nearly 7800%, but the Income Tax Department denied the then available LTCG exemption on the sale of listed shares on suspicion of price manipulation.

However, the ITAT has now held that suspicion arising from a sharp rise in a share's price, without evidence linking the assessee to price manipulation, cannot sustain an addition under Section 68 of the Income Tax Act.

The order, delivered on August 25, 2026, may serve as a significant relief for investors whose legitimate stock market gains have been questioned under the penny stock scrutiny pursued by the Income Tax Department in recent years.

This article tells the full story of the case and explains how the investor won relief.

The case involved Gyanchand Baksharam Godhwani, a Mumbai taxpayer who had purchased 10,000 shares of Shubham Granites Ltd, later known as Blazon Marbles Ltd, on February 28, 2011, from Ahmedabad Gases Ltd for ₹30,000, paid through banking channels. After a stock split from ₹10 face value to ₹2 on June 6, 2012, the holding became 50,000 shares. In April and May 2014, Godhwani sold 27,000 shares on the stock exchange for a net consideration of ₹12,78,155 and claimed the resulting long-term capital gain (LTCG) of ₹12,61,955 as exempt under Section 10(38) of the Income-tax Act, 1961. The remaining 23,000 shares stayed in his demat account.

The above information from the tribunal's order indicate the share's price had jumped nearly 7800% in just three years. Here's how

Godhwani filed his return of income on August 26, 2015, declaring total income of ₹10,48,560. His case was selected for scrutiny on account of sale of shares and claim of exempt LTCG.

The Assessing Officer relied on investigation inputs about alleged manipulation in penny stocks, the rise in Blazon Marbles' share price, the company's weak financial position, and the general modus operandi attributed to entry operators. He observed that the assessee was not a regular trader, had not satisfactorily explained the price rise, and had sold shares near the peak while retaining the balance.

The officer treated the LTCG of ₹12,61,955 as a non-genuine transaction and added it under Section 68.

The CIT(A) also upheld the addition, holding that investigation inputs and the test of human probabilities outweighed the documentary evidence. However, the ITAT found this approach untenable.

The tribunal noted that the purchase of 10,000 shares for ₹30,000, their dematerialisation, the stock split, the sale of 27,000 shares through the stock exchange, payment of securities transaction tax, and receipt of sale proceeds through banking channels had not been disproved by the Revenue.

"There is no material referred to in either of the impugned orders showing that the purchase consideration was paid in cash, that sale proceeds were funded by the assessee, or that any cash trail was traced from the assessee to a broker, operator or purchaser," the order stated.

The tribunal further observed that the addition rested on "a general description of the modus operandi in penny-stock cases, the financial profile of the company, the movement in its share price and the inference drawn from the timing and quantity of the assessee's sale." Such circumstances may call for close scrutiny, the tribunal held, "but they cannot, without a transaction-specific link, displace documentary evidence or establish that this assessee was a party to price manipulation".

Crucially, no statement naming the assessee had been brought on record. Neither the assessee nor his registered broker had been identified by SEBI as a person involved in manipulation of the scrip.

The ITAT noted that the assessee retaining 23,000 out of 50,000 shares "materially weakens the inference that the entire arrangement was pre-planned to introduce a fixed amount of unaccounted money".

The tribunal also referred to a coordinate bench decision in Shri Yogesh P. Thakkar v. DCIT, involving the very same scrip of Blazon Marbles Ltd, where the SEBI order dated October 13, 2017 was examined and found to deal with penalties for procedural violations and non-appearance, without alleging the assessee's involvement in manipulation.

On the test of human probabilities invoked by the CIT(A), the tribunal said, "The test of human probabilities is an aid in appreciating evidence; it cannot substitute proof of the alleged nexus when the primary evidence of purchase, holding and exchange-traded sale remains unrebutted. An unusual rise in price, without more, may generate suspicion, but suspicion, however strong, cannot by itself sustain an addition under section 68 of the Act".

The tribunal directed the Assessing Officer to delete the addition of ₹12,61,955 and allow the exemption claimed under Section 10(38).